MARTEN TRANSPORT LTD annual report, FY2011

Marten Transport, Ltd. — FY2011 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter 2011 results. Marten is a temperature-sensitive truckload carrier with Truckload and Logistics reporting segments, serving the United States and portions of Canada and Mexico.

Business Context and Operations

2011 operating revenue was generated primarily from temperature-sensitive freight, which represented approximately 81% of truckload revenue.
The company operated 2,281 tractors, including 2,233 company-owned tractors and 48 independent-contractor tractors, plus 4,124 trailers at year-end.
Regional operations represented 64.7% of the truckload fleet at December 31, 2011, compared with 51.8% at December 31, 2010.
Logistics activities include brokerage, intermodal transportation and the company’s consolidated 45% interest in MW Logistics, LLC.
Kraft and General Mills represented approximately 11% and 10% of 2011 revenue, respectively. The top 30 customers represented approximately 74% of revenue.

Financial Performance and Key Metrics

Metric	2011	2010	Change
Operating revenue	$603.7 million	$516.9 million	Up 16.8%
Operating income	$43.0 million	$35.3 million	Up 21.9%
Net income	$24.3 million	$19.7 million	Up 23.0%
Diluted EPS	$1.10	$0.90	Up $0.20
Operating ratio	92.9%	93.2%	Improved 0.3 percentage points
Stockholders’ equity	$320.4 million	$295.9 million	Up $24.5 million
Cash and cash equivalents	$20.8 million	$5.3 million	Up $15.5 million
Long-term debt	None	$19.3 million	Repaid in 2011

Truckload revenue increased 16.1% to $455.8 million, including $98.1 million of fuel surcharge revenue. Truckload operating income increased 23.1% to $35.3 million, and the segment operating ratio improved to 92.3% from 92.7%.
Logistics revenue increased 19.1% to $147.8 million. Logistics operating income increased 17.0% to $7.7 million, while its operating ratio was essentially unchanged at 94.8%.
Revenue excluding fuel surcharges increased 11.3% to approximately $490.7 million. Fuel surcharge revenue increased 48.9% to $113.0 million because of higher diesel prices.
Average truckload revenue excluding fuel surcharges per tractor per week increased 6.5% to $3,162. Average fleet size increased by 65 tractors, or 3.1%.
The average length of haul declined 4.4% to 626 miles as regional operations expanded.
Net fuel expense increased 15.5% to $55.3 million, and represented 13.6% of truckload and intermodal revenue excluding fuel surcharges, compared with 13.1% in 2010.
The DOE national average diesel price increased to $3.83 per gallon from $2.99 per gallon. Management estimated that a further 5% increase in the average diesel price would have increased 2011 fuel expense by approximately $7.7 million.
Net cash provided by operating activities increased to $86.2 million from $64.5 million.
Net capital spending was $38.9 million, including revenue equipment purchases net of dispositions. The company also spent $7.4 million on partial construction of two regional facilities.
Quarterly fourth-quarter 2011 revenue was $158.3 million, operating income was $13.0 million, net income was $7.7 million and diluted EPS was $0.35.

Material Changes Versus the Prior Comparable Period

Profitability improved primarily because of higher revenue per tractor per week, continued regional temperature-controlled growth and increased Logistics operating income.
Operating expenses increased 16.4%, below the 16.8% revenue increase, producing modest operating-ratio improvement.
Fuel and fuel taxes increased 35.4%, but fuel surcharge programs and operating-efficiency initiatives offset a substantial portion of the increase.
Depreciation increased 10.8% to $57.5 million because of fleet growth, higher equipment costs and the shift toward company-owned tractors.
Insurance and claims expense increased 9.6% to $18.2 million. The company’s insurance and claims accrual declined to $13.0 million from $17.7 million.
The gain on disposition of revenue equipment increased to $3.8 million from $1.1 million, reflecting stronger used-equipment values.
The company repaid $19.3 million of debt and ended the year with no outstanding principal balance under its revolving credit facility.
Quarterly dividends increased to a full-year total of $1.8 million, or $0.08 per share, from $0.9 million in 2010.

Liquidity, Debt and Commitments

The unsecured revolving credit facility has a $50 million commitment, expandable to $75 million, and matures in May 2016.
At December 31, 2011, the company had $41.1 million of remaining borrowing availability after $8.9 million of standby letters of credit.
Management stated that available cash, operating cash flow and borrowing capacity were adequate for at least the next twelve months and that no significant liquidity constraints were anticipated.
Estimated 2012 capital expenditures, net of dispositions, were approximately $80 million.
Contractual obligations totaled $73.2 million, including $67.4 million of 2012 revenue-equipment purchases, $4.3 million of building construction obligations and $1.4 million of operating leases.

Outlook, Risks and Unusual Items

Management emphasized continued growth in regional temperature-controlled operations, brokerage and intermodal services, supported by a modern fleet and strong balance sheet.
Higher new-equipment prices, stricter emissions requirements and expected increases in depreciation and ownership costs may pressure future margins and cash flow.
Fuel-price exposure remains significant. Surcharges do not fully recover fuel used for non-revenue miles, out-of-route miles or idling, and the company had no fuel-hedging instruments at year-end.
Driver recruitment and retention remain risks because of industry-wide shortages and the impact of Compliance, Safety, Accountability requirements. Revised hours-of-service rules effective July 2013 were expected to reduce driver productivity.
Customer concentration creates risk: the top ten customers represented approximately 51% of revenue, and major customer contracts generally did not require minimum shipment volumes.
The company self-insures significant portions of auto liability, workers’ compensation, cargo, property and health claims. It was responsible for the first $1.0 million of each auto-liability claim and the first $750,000 of each workers’ compensation claim.
Routine litigation was not expected by management to have a material adverse effect on long-term financial position or results, although individual periods could be affected.
Management and KPMG concluded that internal control over financial reporting was effective as of December 31, 2011.

Investor Verification Checklist

Verify the sustainability of revenue growth excluding fuel surcharges and the contribution of regional operations.
Monitor fuel prices, surcharge recovery, non-revenue miles and net fuel expense as a percentage of revenue.
Assess whether the planned approximately $80 million of 2012 capital spending can be funded while maintaining dividends and liquidity.
Review customer concentration, contract renewal terms and exposure to loss or repricing of Kraft, General Mills and other major customers.
Evaluate driver availability, wage pressure and the operational effects of revised hours-of-service rules.
Track insurance claims development, self-insured exposure and the adequacy of claims reserves.
Confirm compliance with revolving-credit covenants and the availability of the $41.1 million unused credit capacity.
Review the effect of equipment prices, used-truck resale values and emissions regulations on depreciation, replacement costs and gains or losses on disposals.